Legal Briefing

Finance | 01 December 2009

With the ever-increasing trend towards globalisation, it is often observed that there are few businesses of reasonable size that do not trade across borders. At this difficult economic time, many are likely to have overseas suppliers, contractors, counter-parties and customers undergoing financial difficulties. For these businesses, cross-border insolvency issues are cropping up frequently. At the same time, the law is rapidly developing, with cases on cross-border insolvency issues regularly brought before the English and foreign courts.

There are two main regimes to consider in English law when dealing with cross-border insolvency issues. For companies that operate in the member states of the EU (except Denmark, which opted out) the place to look is the EC Regulation on Insolvency Proceedings (the EC Regulation).1 For companies in states outside the EU, it is necessary to look at the Cross-Border Insolvency Regulations (CBIR) 2006, without overlooking the fact that both the common law and s426 Insolvency Act (IA) 2000 regimes may still be applicable.2 All of these regimes have recently thrown up case law that is helpful in understanding how cross-border insolvency situations can be resolved to the best advantage. This article concentrates on CBIR 2006 and related case law developments.

CBIR 2006

CBIR 2006 came into effect on 4 April 2006. CBIR 2006 adopts and implements into English law the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the Model Law), adopted by UNCITRAL in 1997. The Model Law is implemented by the incorporation of its articles 1 to 32 (slightly modified to mesh properly with English law) into schedule 1 to CBIR 2006.3

Broadly, CBIR 2006 deals with the recognition of foreign insolvency proceedings, and with the co-ordination and administration of cross-border insolvencies of non-EU companies in Great Britain (meaning – unusually – England, Wales and Scotland, but not Northern Ireland). CBIR 2006 enables a foreign representative administering foreign insolvency proceedings to apply to the English court for recognition, if the debtor either has a place of business or assets in Great Britain, or if for any other reason Great Britain is the appropriate forum for the recognition of the proceedings.

A key feature of CBIR 2006 regime is that there is no reciprocity in relation to other jurisdictions. That means, in theory, that all properly appointed foreign representatives from jurisdictions around the world can gain access to the courts in Great Britain and have their status and powers recognised. By contrast, British insolvency office-holders will not have the same rights and privileges, unless applying to another jurisdiction that has implemented the Model Law.4 Therefore, although article 1 of schedule 1 to CBIR 2006 contains a provision authorising a ‘British’ insolvency office-holder to act in a foreign state on behalf of a proceeding under British insolvency law, it will in fact depend on the law of the foreign state as to whether or not such an officer will have this status and power recognised.

Samsun Logix Corporation v DEF [2009]

Samsun Logix is thought to be the first occasion that the English courts have used powers granted under CBIR 2006 to recognise foreign main proceedings in respect of a corporate debtor. Samsun Logix Corporation (Samsun) is a South Korean integrated ship-owner operator, a conglomerate with global operations that was in serious financial difficulties, with debts in excess of US$100m, according to evidence filed in the Korean rehabilitation proceedings. Those proceedings were initiated by Samsun itself by petition to the Seoul Central District Court on 6 February 2009. Following the order of the Korean court appointing a receiver in rehabilitation proceedings, Samsun, acting by its receiver, made applications to courts seeking recognition of the Korean rehabilitation proceedings in several jurisdictions, including England, the US, Australia, China, Singapore and Belgium.

Samsun Logix: application in England

On 12 March 2009 the Korean court-appointed receiver of Samsun applied to the High Court under schedule 1 to CBIR 2006 for recognition of the Korean rehabilitation proceedings as foreign main proceedings and also for discretionary relief under article 21(1)(g) of the Model Law in the form of a moratorium similar to that in relation to a company in administration.5

Article 20 of schedule 1 to CBIR 2006 provides that on the recognition of a foreign main proceeding by the English court, an automatic stay arises to prohibit the commencement or continuation of legal proceedings, the execution against the debtor’s assets and the transfer, encumbrance or disposal of assets. This is a stay with the same scope and effect as applies in a compulsory liquidation.6 This stay is far more limited in scope than the administration moratorium and it does not affect any right to take steps to enforce security over the company’s property or to repossess goods subject to conditional sale, lease or retention of title.

The receiver’s evidence showed that Samsun was facing a large number of claims, many of which had been submitted to arbitration in London. Evidence also showed that the Korean rehabilitation proceedings were broadly in the nature of US Chapter 11 proceedings and that the aim of the Korean rehabilitation proceedings was to rescue the company as a going concern by way of a rehabilitation plan.

Given the nature of the Korean proceedings as rehabilitation proceedings under which the rescue of Samsun was being proposed, the receiver took the view that Samsun needed the much wider protection of the type of moratorium that applies in administration.

Samsun Logix: decision

On the application, Morgan J decided that the requirements of article 17(1) of the Model Law (dealing with the proof of the proper implementation of the insolvency proceedings under a foreign law) had been satisfied and the court was obliged to grant recognition under article 17(1). Morgan J also decided that the evidence showed that the company’s centre of main interests (COMI) was in Korea and therefore the Korean rehabilitation proceedings would be recognised as foreign main proceedings under article 17(2)(a) of the Model Law. Morgan J held that the automatic consequences of such recognition would include a stay on proceedings under article 20 and noted that arbitrations against Samsun about to commence in London would be stayed immediately as a consequence of the recognition. In light of the evidence as to the nature and purpose of the Korean rehabilitation proceedings, Morgan J also decided that it was appropriate to grant discretionary relief under article 21(1)(g) in the form of a moratorium, such as would apply in an administration.

The effect of Morgan J’s order is to recognise the primacy of the rehabilitation proceedings implemented by Samsun in its home jurisdiction of Korea. The administration moratorium will require the consent of the receiver or the permission of the English court, for example, before any step to enforce security over the company’s property can be made or to repossess goods subject to lease, conditional sale or retention of title, and would also prevent winding up orders being made against the company.

Recognition in other jurisdictions

Within a month of the decision of the English court granting recognition to the Korean proceedings as foreign main proceedings under the Model Law, both the Australian and US courts followed suit, making very similar orders under their respective local enactments of the Model Law and, in both cases, a stay on proceedings came into being as a result of the court orders to protect Samsun during its rehabilitation proceedings. The Australian order was made on 17 April 2009 and the court commented that the Korean proceedings were to be recognised as foreign main proceedings because they were taking place in the state where Samsun had its COMI.7 The US Bankruptcy Court made its order recognising the Korean proceedings as foreign main proceedings on 21 April 2009. It is understood that the Belgian and Singaporean courts have also recognised the Korean proceedings.

Analysis of the Samsun Logix decision

Under English law, the courts have long recognised properly appointed foreign representatives and have had power at common law to assist insolvency representatives from other jurisdictions. Former Commonwealth countries also benefited from the special regime under s426 of IA 2000. By virtue of CBIR 2006 the English courts will be able to give recognition and assistance to insolvency representatives from any jurisdiction in the world, while the existing regimes will remain available in parallel. Broadly, the position is now more certain and there is a special procedure in place that foreign officeholders can implement more easily.

The nature of the moratorium or stay in insolvency proceedings is often misunderstood. In an English liquidation, its purpose is to stop the race to be the swiftest (ie the first to execute scoops the pool) and to avoid the expense of liquidation. English law therefore provides:

for a bar to come down;

for claims to be valued through a swift and economical method of assessment; and

for the proceeds of the assets of the company to be distributed equitably among those entitled to them in the order of their priority.

In an administration, which Samsun’s Korean rehabilitation appears to resemble more closely, the reason is more to enable the company’s business to survive as a going concern by stopping its creditors from destroying it by seizing its assets and selling them to satisfy its debts.

Applications to lift the stay

Despite the moratorium imposed in Samsun Logix, the English court has a discretion to allow a party to pursue its claim in litigation or arbitration, on such terms as it may impose. There have been at least two reported cases of applications by creditors for permission of the court to commence or continue proceedings against Samsun in England. In one case, a party applied to court for permission to enforce a contractual lien under an English law contract. The court refused permission on the basis that enforcement of the lien would prejudice ongoing Korean proceedings over the validity of the lien. The court sought to balance the interest of Samsun’s creditor by ordering that the creditor could not be estopped in future from challenging a Korean court order, by seeking an order of the English court to enforce the lien at a later stage, purely on the basis that the lien was invalid because the creditor had participated in the Korean proceedings.8 In another case heard in April this year, Norris J held that in circumstances where a stay on arbitration proceedings had arisen under articles 20-21 of schedule 1 to CBIR 2006 on the recognition of the Korean rehabilitation proceedings, the question of whether any such stay was to be lifted was a matter of English law for the English court, which had unfettered jurisdiction in that regard.9

COMI

It is important to note that ‘foreign main proceeding’ is defined as one that constitutes a foreign insolvency proceeding taking place in the state where the debtor has its COMI.10 COMI is not defined in the CBIR 2006, but it is subject to the presumption that it is the company’s registered office. There is a fair amount of case law on this issue, arising mainly in connection with the EC Regulation. In Samsun Logix, the COMI was not a major issue as the English court had clear evidence that Samsun’s COMI was in Korea. Following the decision in July the COMI issue came before the English court in the context of CBIR 2006 in relation to Re Stanford International Bank Ltd & ors, [2009]. A receiver had been appointed to the company by a court in Texas on the application of the US Securities Exchange Commission. Subsequently a court in Antigua, where the company had its registered office, appointed a liquidator to the company. Both the receiver and the liquidator applied to the English court for recognition of the proceedings in which they were appointed as foreign main proceedings. The court held that the decision of the European Court of Justice in Eurofood IFSC (Area of Freedom, Security & Justice) [2006] was equally applicable in the context of CBIR 2006 as the EC Regulation. Therefore, in determining the COMI in a CBIR 2006 case and to rebut the presumption that a company’s COMI is its registered office, there must be objective factors that the company’s head office function is carried out elsewhere. Those factors must be ascertainable to third parties and must be in the public domain, that is, what a typical third party would learn in the ordinary course of business with the company. On the specific facts of Stanford, the court decided that the company’s COMI was its registered office in Antigua, so that recognition as foreign main proceeding was given to the Antiguan liquidation proceedings.

Summary

Samsun Logix is highly significant because of the consistency of approach to the application of the Model Law in England, the US and Australia. This approach makes it more likely that the rescue of Samsun’s business will be achievable and should set a precedent for the future.

Clearly, the recognition given to Samsun’s Korean rehabilitation proceedings has affected its creditors (both secured and unsecured) with English law claims, as well as those in the US and Australia. The moratorium will prevent legal action, including arbitration proceedings, against Samsun in England, which many UK creditors will consider to their detriment. However, they can console themselves with the knowledge that other creditors in other jurisdictions are also similarly prevented from taking action.

The changes that the Model Law will bring about will need to be carefully analysed by insolvency representatives of foreign insolvency proceedings, banks, and restructuring and insolvency advisers involved in cross-border work. However, the decision is of wider significance in that it will affect the rights of all UK creditors (secured and unsecured) of distressed foreign companies with business, assets and/or other connections with this country. For this reason it is worth close attention.